Have you ever wondered why some customers leave your business, never to return? That’s what we’re here to talk about today: churn.
Also known as customer attrition, churn happens when customers stop doing business with a company. It’s a crucial metric for any business as it directly impacts revenue growth and profitability. In fact, according to one market study, customer churn is estimated to cost businesses over $136 billion per year in the U.S. alone.
Churn analysis is all about understanding who is leaving and how often. Armed with that info, you can then figure out what to do to prevent it. It involves calculating your churn rate, analyzing possible reasons for customer churn and developing strategies to reduce churn and improve retention.
In this blog, we’re covering everything you need to know about churn analysis, including how to conduct one and tips for scoring quick wins against churn. No matter your industry or size, understanding churn (and how to prevent it) can help you stay ahead of the competition and build a loyal customer base.
Let’s get started!
Why You Should Care About Churn
No one wants to lose customers. At the same time, it can be tempting to simply brush off your customer churn rate and focus solely on bringing in new customers instead. But what if we told you that reducing customer churn can have a much bigger impact on your growth and that customer retention is even more important than acquisition?
For starters, the cost of retaining customers is often less than customer acquisition costs. It can cost anywhere from 5 to 25 times more to acquire new clients than to retain existing customers.
But it’s not just about saving money. Retaining customers is essential for maintaining your revenue levels. Recent research found that, on average, 50% of a brand’s sales come from the top 20% of its customers. In other words, keeping your most loyal customers means securing half of your future sales.
Loyal customers are also more likely to refer new customers to your business. Word-of-mouth marketing is a powerful tool, and happy customers can be some of the best brand ambassadors you could ask for. Nearly 85% of Americans say that a recommendation from a friend or family member makes them more likely to purchase.
Last but not least, loyal customers get even more valuable over time. They tend to spend more money on your products or services and have a higher customer lifetime value. In fact, a majority of customers (56%) are willing to spend more on a brand they’re loyal to even if cheaper options exist.
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So while churn may seem like a small problem in the short term, it can have big consequences for your business. If you want to grow your revenue, get more referrals and increase customer lifetime value, then it’s time to start paying attention to churn.
Churn Analysis: Who Really Needs It?
Customer churn analysis is a powerful tool that helps businesses understand the rate at which they lose customers and why. Because churn analysis can provide valuable insights into customer behavior, all companies and organizations stand to benefit from conducting their own analyses.
There are some industries, though, that should pay extra attention to churn. For example, churn analysis is particularly crucial for industries where recurring revenue from repeat customers is vital to their business model.
Let’s say your industry is centered around large, one-time purchases (cars, houses, etc.). Reducing churn would likely not be your No. 1 priority since regular customers aren’t a huge part of your customer base. On the other hand, for SaaS companies, telecommunication providers and others that depend on their customers continuing to use their services every month, a high churn rate could be catastrophic.
So how do you know whether your churn level is cause for concern? Compare it to the average churn rate in your industry. While the average is around 25%, some industries may have lower or higher churn because of business model differences, as our example above demonstrated.
Here are just some of the latest churn rates by industry:
- Banking — 15%
- Insurance — 17%
- Healthcare — 23%
- Telecommunications — 23%
- Travel — 45%
As you can see, a churn rate of zero is pretty much unattainable. Luckily, though, getting close to your industry average or below it is possible through smart customer retention efforts.
At Idomoo, we frequently work with clients who want to improve retention, but when we ask about benchmarks — “What’s your retention or churn rate currently?” — they don’t have one. This isn’t uncommon, but it can be a missed opportunity. Always establish a baseline. Otherwise, it’s impossible to know whether your efforts are making an impact.
How To Conduct a Churn Analysis
Now, let’s walk you through the 5 steps to conducting a churn analysis.
First, you need to define what churn means for your business. Is it a customer who cancels their subscription or is it a customer who had their services involuntarily cut because of payment failure? Is it a customer who hasn’t made a purchase in the last few months or the last few years? The answers will depend on your own business plans.
Secondly, you’ll need to determine the time frame for your analysis. Are you looking at quarterly or monthly churn rates? Once you have a clear definition and time frame, you can begin collecting data.
Collecting data is the third and most crucial step in conducting a churn analysis. Gather all of the customer data, such as transaction history and engagement history, that you need to better understand who’s churned and why.
Once you’ve collected all the necessary data, it’s time for the fourth step: calculating your churn rate. Sometimes referred to as your customer attrition rate, your churn rate is the percentage of customers who stop using your product or service in a given period of time.
To calculate your churn rate, divide the number of customers who left by the total number of customers at the beginning of the time frame.
Churn Rate = Total Customers Lost / Total Customers
Next, you’ll want to determine the impact of that churn. Look at the revenue that you lost due to churn. This will help you understand the financial impact of churn and the importance of reducing it.
Finally, it’s time to identify and analyze the reasons for churn. This is where the actionable insights come in. Identify patterns in customer behavior, segment your customer base, and look for seasonal trends. Analyze this data to identify why your customers are leaving and potential opportunities for retention. This step can even help you start predicting churn.
In summary, the process goes a little something like this:
- Define what churn is to your business. There are 2 major types of churn: voluntary and involuntary. Voluntary churn occurs when a customer decides to leave, while involuntary churn is when a customer is lost due to circumstances like payment failure. Also, decide how much time passes before a customer is considered to be lost.
- Determine the time frame. Decide on the time frame for the analysis. It could be monthly, quarterly, annually, etc., depending on how your business operates.
- Collect churn data. Collect data on customer activity, purchase history, customer engagement and demographics.
- Calculate churn rate. Use the formula above to calculate the churn rate for the period you selected.
- Calculate financial impact. Determine how much revenue you lost due to churn. This will help you understand the financial impact of churn on your business.
- Identify and analyze reasons for churn. Analyze customer behavior and trends to determine the reasons for churn. Consider factors such as customer segments, behavioral patterns and seasonal trends.
Pro tip: Keep in mind that retention is inversely proportional to churn. A customer who remains loyal to your business is less likely to churn. You can check out our guide on how to calculate retention rate for more details.
3 Ideas for Scoring Quick Wins Against Churn
When it comes to reducing churn, it’s often the little things that can make a big difference. By taking a closer look at the common points of friction in the customer experience, you can identify areas for improvement that can lead to quick wins in your retention efforts.
Here’s one such touchpoint: moments where your customers are particularly at risk of churning, such as during first bills and renewals.
1. Connect at Key Moments
There are some customer interactions that, by nature, tend to lead to the loss of a customer. For example, first bills can be a significant moment of potential churn, especially if the bill has extra fees for setup or complicated pricing concepts like pro rata that customers might not readily understand.
At Idomoo, we’ve found that creating video bill explainers can help reduce churn. One such Personalized Video cut churn by 37% within the first 90 days. By proactively addressing potential confusion or frustration around billing, you can demonstrate that you value your customers and their experience.
Renewals are another critical touchpoint. When customers are reassessing how much value you bring to the table, it’s important to take a proactive approach. One example of this is the renewal reminder that Zurich implemented below.
Instead of sending a generic renewal notice, Zurich sent a video personalized to each customer that thanked them for their loyalty and highlighted the benefits of continuing their policy. This approach helped to turn potential churn into something that actually strengthened loyalty and showed that Zurich cared about its customers.
By focusing on key moments in the customer journey and personalizing communications, you can show customers that you value them as individual customers rather than just a nameless source of revenue. This can lead to increased loyalty and reduced churn, as customers feel valued and connected to your brand.
2. Elevate Your Customer Service
We all know how frustrating it can be to experience poor customer service. You’re on hold for hours, listening to the same annoying music, or you’re passed from one person to another without any solution to your problem — often having to repeat the same information.
This is why it’s important to improve your customer service in ways that ensure customer satisfaction and discourage churn.
One way to upgrade your customer service is through personalization. Remember how frustrating it is to reintroduce yourself and your problem over and over to different customer care representatives? Personalized experiences are the opposite of this. They make customers feel seen and valued. Adding personalization within your digital communication channels is a great way to provide a human touch to your customer support interactions.
Another way to improve customer service is by being available. Customers today want to be able to self-serve, especially when it comes to simple queries. Interactive Videos, like the mortgage video below, are a practical and engaging way to get in front of any potential questions and let customers find the answers they need on demand.
By elevating your customer service, you can reduce friction, boost customer success and protect against churn.
Don’t just solve the problem — create an experience that keeps customers engaged and coming back for more.
3. Show Love to Your Loyal Customers
Everyone wants to feel appreciated, and your customers are no different. By taking the time to show appreciation to your long-time customers, you can strengthen their loyalty and encourage them to continue doing business with you.
Think about ways to surprise and delight your top customers. You may send them offers tailored to their individual needs or interests. You might reach out personally on special occasions — like the anniversary of the day they became a customer — to celebrate your time together.
And don’t forget the power of a simple “thank you.” Whether it’s a handwritten note or a Personalized Video, expressing gratitude to your customers, fans or subscribers can go a long way. SickKids Foundation’s Personalized Video thanking donors for their support is a great example of how to do this effectively.
By acknowledging their contribution and showing the impact it has had, this kind of messaging strengthened the connection between donors and their cause. Remember, it’s not just about making a sale or securing a donation. It’s about building customer relationships that last.
One other important way to show appreciation is through loyalty programs. These programs reward customers for their continued business, and they can be as simple or complex as you like. Whether you offer discounts, custom content or exclusive access to events, loyalty programs are a great way to keep your most loyal customers by your side.
Extra: We wrote a whole white paper about how to improve your loyalty program. Grab your free copy, and get started today.
Ready To Tackle Churn? We Can Help
Now that we’ve covered what churn analysis is and a couple of different ideas for reducing churn, it’s time to put it all into action. By identifying the reasons why customers are leaving and taking proactive steps to retain them, you can see significant uplifts in retention and revenue.
At Idomoo, we’ve helped plenty of brands reduce churn with the power of data-driven video. By strategically using Personalized and Interactive Video to connect with customers in real time when they’re most likely to churn, we’ve seen our clients achieve results like:
- 17x user reactivation
- 31 more NPS points
- 85% renewal rate
If you’re ready to see real results from your retention efforts, reach out. We’d love to show you how our solutions can help you achieve your business objectives and keep your customers happy and engaged.
